Financial markets reacted swiftly on news the United Kingdom had voted to secede from the European Union by majority vote of its people. Based on media reports, one would have thought the world was ending — it wasn’t — and that stock prices had begun an irreversible downward spiral — they hadn’t.
As investors, we can learn from seminal events like the Brexit and take mental notes to help make better investment decisions in the future.
Lesson 1: Opinion polls and wagering on outcomes have little investment value or predictive power. Lopsided betting by the “stay” crowd skewed the odds that the U.K. would remain. The polls and betting public were wrong, and the uncertainty surprised financial markets. The “correction” that immediately followed lasted exactly two days — Friday, June 24, and Monday, June 27.
Lesson 2: Markets move quickly in the age of automation and program trading. News that used to take months or years to digest now takes minutes, hours and days. Automatic savings programs such as 401(k) contributions afforded some opportunity to buy low, but the average investor may have found it difficult to act on such short notice. If you are too nervous or too busy to improve your position during volatile periods, seek advice from a qualified professional.
Sign Up and Save
Get six months of free digital access to The Idaho Statesman
Lesson 3: Ongoing comparisons to the 2008-09 credit bubble by the financial press continue to create misguided fear. For example, the CBOE Market Volatility Index, or VIX, peaked at 26 during the Brexit correction, versus a reading of 90 in fall 2008. The previous VIX spike to 48 was in August 2011, when Standard & Poor’s downgraded the U.S. debt from AAA to AA. Try to think of volatility as an opportunity to improve your position rather than overreact and change your portfolio.
Lesson 4: Do not assume a sovereign or political event such as Brexit will trigger a worldwide recession. According to the World Bank, the gross domestic product of the U.K. is about $1.1 trillion, or 4.6 percent of the world economy. The U.K. economy will likely slow, and trade agreements will be renegotiated, but the Brexit is unlikely to tip the U.S. or Europe into recession anytime soon. The U.K. can redeploy its 8.5 billion-pound net annual contribution to Brussels as it sees fit.
Let’s all resolve to view world events such as Brexit in the proper context, and not be thrown “off plan” by them. And that trip to London you’ve been dreaming about? Recent devaluation of the pound sterling offers an exchange-rate discount, so call your travel agent today and book it.
Mark Daly is managing director, investment officer, Daly & Vachek Investment Consulting Group of Wells Fargo Advisors. dvicg.com; 333-1433. This column appears in the July 20-Aug. 16, 2016 edition of the Idaho Statesman’s Business Insider magazine. Click here for the daily Statesman e-edition, including Business Insider (subscription required).